How to Enter Startup Costs or Expenses Paid for With Owner’s Personal Monies

by Marie on March 26, 2016

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How to Enter Startup Business Costs

The way in which these startup expenses are entered will depend on how the owner wants to treat them – loan or investment, the way the business is structured – Sole Proprietor or Single Member LLC, Partnership or Multi Member LLC, or Corporation, as well as when these expenses were incurred.

What are Startup Expenses or Costs?

Before we get into the above, let’s start off with the main question: What are startup expenses or costs? Not everything is a startup cost and to determine what is and isn’t a startup cost we have to look at whether the costs were incurred prior to the start date of the business (costs to be amortized) or subsequent to the start date of the business (costs to be expensed). Startup costs are those expenses that were incurred prior to the start date of the business, and are amortized over a number of years so they are not a total expense in the first year. Initial costs – market research, advertising the future opening of your business, salaries for training employees before the business opened, incorporation costs, trademarks and the likes are startup costs.

As for amortization, that’s just a fancy accounting term accountants like to use when they refer to the process of spreading costs out to more than one year. They are usually intangible costs like legal fees, government filing fees and the likes. Fortunately, amortization is generally a straight-line process; you take the costs and divide them by the number of years and expense by that portion. It is always important to consult a CPA prior to booking startup costs.

If there are technology equipment such as computers or furniture in the initial purchases, you will need to separate them if they are used in the business, since they will need to be depreciated. Depreciation is generally for tangible items such as buildings, equipment, computers, furniture, vehicles, etc. Again, speak with your CPA about what was purchased in order to have all the startups entered accurately, as well as to get the help in setting up a depreciation schedule. For tax purposes, the IRS has specified fixed asset lifespan depending on what kind of fixed assets they are.

Journal entries are the best method to use when entering startup costs, regardless of the type of startup, the type of business structure, or whether the startup is a loan or an investment to the business. You will create an “Other Asset” account under which you can make sub accounts where you will be debiting the transactions, and an equity or loan account where you will be crediting them – depending on if the owner is investing or lending the monies to the company – respectively.

If some of these startup expenses are fixed assets, you will need to create individual Fixed Asset accounts for each, with the corresponding entry going to the Equity or Loan account. If there are multiple small transactions to be entered, you can enter them via the asset account register or the Equity or Loan account register you created. This way you will be able to enter as much information as possible including the dates of each transaction.

Whatever you do, just make sure that you get the correct equity balance to start off with; that is, how much did the owner(s) put in the business to start the business? In taxes, the equity accounts will be used to track the owner’s basis, which is adjusted up for income, owner’s contributions and other items, and down for losses, draws, and other items. Depending on the type of structure – sole proprietorship, LLC, partnership, C-corporation, S-Corporation, business losses may or may not be deductible for tax purposes if the owner does not have enough basis to deduct them against.

You should also speak with your CPA about whether it is better to consider these startup costs a contribution by the owner to the business, or a loan to the business to be paid back at some point in the future, as it relates to taxes.

Another way to enter these initial expenses on QuickBooks for a Sole Proprietor or Single Member LLC, is by using a Credit Card Account called something like “Owed to owner” and entering the expenses from there. This will increase the liability balance while allocating the expenses to their relevant business expense account. If the business pays it back, use the credit card account on the check which will zero out the credit card account. If it does not pay the monies back, use a journal entry to transfer it to the owner’s contribution account. Of course, this is based on what the initial startup costs are.

This is an option used by many QuickBooks users, and although it will make the accounts “accurate”, I do not recommend it from an accounting standpoint. Bookkeeping should be seamless and trackable! Just imagine that someone takes over the bookkeeping and trying to figure out the books, they will no doubt be looking for a business credit card since one would have been entered. For this reason I do not recommend using this method. Why add a credit card to the business in QuickBooks when there isn’t actually one for the business?

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